EUR/USD posts sharp gains as FOMC holds rates steady, lowers outlook

Investing.com -- UR/USD rose considerably on Wednesday after the Federal Reserve held short-term interest rates steady and lowered its rate path outlook for each of the next two years.

The currency pair traded in a broad range between 1.1190 and 1.1299 before settling at 1.1264 at the close of U.S. afternoon trading, up 0.0043 or 0.50% on the session. With the sharp gains, the euro closed above 1.11 versus the dollar for the ninth consecutive session. More broadly, the euro is relatively flat against its American counterpart over the last month, down 0.39% during that span.

EUR/USD likely gained support at 1.1055, the low from March 15 and was met with resistance at 1.1616, the high from May 3.

On Wednesday afternoon, the Federal Open Market (FOMC), as expected, left the target range of its benchmark Federal Funds Rate unchanged at a level between 0.25 and 0.50%. It marked the fourth consecutive meeting the FOMC held rates steady at their current level since their historic rate hike in December. The FOMC voted unanimously 10-0 to support the monetary policy action. Previously, Kansas City Fed president Esther George served as the lone dissenter at FOMC meetings in March and April.

"The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen," the FOMC said in the statement. "Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further."

While the FOMC left its median Federal Funds Rate forecast for 2016 unchanged at 0.9%, six members of the FOMC recommended just one rate hike by the end of the year. In the FOMC's last projections in March, only one member of the Committee recommended a single rate hike in 2016. By comparison, the FOMC said in median projections in December that it could implement as many as four rate hikes this year. Notably, the FOMC lowered its median projection for the Fed Funds Rate in 2017 by 0.25% to 1.6%. The FOMC also cut the median projection on the Fed Funds Rate outlook for 2018 by 0.625% to 2.4%.

At a press conference following the release, Fed chair Janet Yellen emphasized that the so-called neutral rate or level of the Federal Funds Rate when the economy is at full employment is "quite depressed by historical standards." Yellen blamed headwinds from low productivity growth rates throughout the world and an aging society for depressing the neutral rate. The weak projections for the long-term path of the neutral rate prompted FOMC members to lower their forecasts for the Federal Funds Rate through 2018, Yellen added.

"To the extent that there are headwinds many of us expect that these headwinds will diminish gradually over time and that's a reason why you see the upward path," Yellen said. "I think you see a downward shift in what is causing this neutral rate to be low are factors that are not rapidly disappearing, but will be part of the new normal."

Yellen also said that next week's Brexit vote on whether the U.K. will remain in the European Union factored into Wednesday's decision.

"Clearly this is a very important decision for the United Kingdom and for Europe," Yellen said. "It is a decision that could have consequences for economic and financial conditions in global financial markets. If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of policy."

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.40% to an intraday low of 94.41, before closing at 94.61 at the end of U.S. afternoon trading. The index is down by more than 5% since early-December.

Any rate hikes by the Fed this year are viewed as bullish for the dollar, as investors pile into the greenback in an effort to capitalize on higher yields.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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